Archive for February 13, 2008
I know that a lot of people do not believe in paying off a mortgage early. I am not one of those people. Since the day we bought the house I have been dreaming of owning it outright. My father paid off his mortgage 7 years early. With his house paid off and a decent pension from his first job he was able to retire early. In early retirement he has time to spend with his grandchildren, my brother’s children, time he relishes.
So after long discussions over many months my husband and I began to realize we could refinance our 30 year mortgage down to a 15 year if rates fell. Due to the sub-prime meltdown we have to squeeze our mortgage down to the conventional size. (Conventional interest rates have fallen much faster than rates for jumbo mortgages.) In our case, we would have to pay off $45,000 in principal in order to reach the $417,000 conventional cut-off point.
We are taking a bit of a risk in paying down the mortgage with such a large chunk of money. That $45,000 is our emergency fund. As we head into a recession I sometimes wonder if it makes sense to stash our money into our house, but sometimes you have to work out the numbers and take a leap of faith.
It’s a little complicated to figure out how much interest we’d be saving by paying off the loan early, because we’ve already paid extra towards the principal, and we’ve held the mortgage for a number of years. So you’ll have to trust me… the savings is $266,000+
Now let’s say we don’t pay off the $45,000 and keep our current loan. If we invested the money at 8% interest we’d have roughly $452,000 in 30 years. Sounds like we’re missing out by refinancing right?
Not at all. If we refinance the mortgage with that same chunk of money we save over $266,000 in interest (a sure bet) and own our house outright at a relatively young age. Not only that… but if we invest the monthly mortgage payment of $3200 starting at year 15, assuming 8% returns, we’ll earn an extra $1,000,000.